Community banking

Filling the gap

Between high street and skid row there is work to be done

CONSUMERS and small traders fed up with their high-street banks tend to despise the humble credit unions—financial clubs owned and run by their members—as an alternative, dismissing them as little more than a leg-up for the very poor. Many unions were started in people's homes, and a decade ago a quarter of them were still run from there.

But times are changing. The credit crunch has vividly exposed the gap in the financial infrastructure between the dominant high-street banks and bottom-feeding pawnbrokers and loan sharks. The government has tried to address the problem by asking big banks—especially those such as Royal Bank of Scotland (RBS), Lloyds TSB and HBOS in which it has (or will soon have) a hefty shareholding—to be nicer to small businesses and mortgage borrowers. On December 3rd Gordon Brown snatched headlines when he announced that eight big lenders had agreed to let struggling borrowers (those made redundant, for instance) defer part of their mortgage payments for up to two years, thus reducing the likelihood of repossession. The Treasury will underwrite the risk.

Some local communities, concerned that their citizens and small businesses are falling between the cracks, are not prepared to rely on banks changing their spots. They are moving to provide financial services of their own. On November 26th Essex County Council discussed plans to create a “Bank of Essex”, no less, which would co-finance small companies alongside the European Investment Bank. “Banks don't seem to be supporting some very viable small businesses,” says Lord Hanningfield, leader of the council.

In Surrey various regional bodies are plotting to launch Surrey Save, a credit union, with the help of Gareth Evans, who has advised on recent start-ups in various London boroughs. One of them, H&F (Hammersmith & Fulham) Credit Union, opened its doors on November 28th.

In many other countries there is a network of local banks, such as the savings banks and Volks- and Raiffeisenbanken in Germany, or the community banks in America, which lend to local folk. In Britain much of that network was stripped away by consolidation among savings banks and mutual building societies, and their conversion into joint-stock companies. The Post Office also sold its Girobank to Alliance & Leicester, a demutualised building society that is now part of the Spanish Santander group.

Colin Breed, a Liberal Democrat MP, has proposed licensing new community banks to offset the “massive over-concentration” in the high street. He would like to see credit unions beefed up. Something of the kind is in the works, although credit unions may not become full-fledged banks. The Treasury and ABCUL (the credit unions' trade association) are working on legislation, likely to apply from next October, that makes credit-union membership more flexible, letting in firms and members from outside a region. It would also allow interest (rather than just dividends) to be paid on deposits, to attract a wider deposit base. Unlike banks, credit unions do not borrow on the wholesale market. They make loans to self-employed traders but not to companies, though the new law will change that.

Three-quarters of Britain's existing 500 credit unions have fewer than 2,000 members. But there are some big ones, such as Scotwest in Glasgow, which has 21,000 members and extends mortgages. Partners Credit Union in Liverpool, a merger of five unions, is about to move its office from the Cotton Exchange to downtown Dale Street, cheek by jowl with the high street banks. HSBC and RBS, look out.